Since bears have prevailed, the path of the least resistance will be lower, with the next key support level being at 1.0800.
Sell the EUR/USD pair and set a take-profit at 1.0800.Add a stop-loss at 1.1050.Timeline: 1-2 days.
Set a buy-stop at 1.1000 and a take-profit at 1.1100.Add a stop-loss at 1.0900.
The EUR/USD pair made a major bearish breakout in the overnight session as the Eurozone economic conditions worsened. The pair dropped to a low of 1.0900, which was the lowest level since March 14th this year. It has fallen by more than 2.40% from its highest point in March.
Recession Bells Ringing?
The Eurozone is in a tougher position than other countries because of the ongoing crisis in Ukraine. The bloc relies mostly on Russian energy and its businesses are more integrated to the region. For example, Germany buys about 40% of its energy from Russia while Austria buys 80%.
At the same time, the bloc’s automobile companies like Fiat Chrysler, Volkswagen, Renault, and BMW rely on key parts from Russia. Among the most important ones are the Platinum Group Metals (PGMs) like platinum and palladium that are mostly used to manufacture catalytic converters.
On Tuesday, it was revealed that the EU was considering adding more sanctions on Russia. These sanctions will suspend imports of important commodities like coal. They will also bloc Russian ships from European waters and transport firms from the region.
While these measures are intended to punish Russia, the EU will not be spared either. For one, the countries will need to source commodities from other countries and at a higher price. At the same time, Russia will likely divert European-bound commodities to other countries and at a higher price.
The EUR/USD pair also declined sharply after a hawkish statement by Lael Brainard of the Fed. She joined other FOMC officials in warning that the Fed will embrace a more hawkish sentiment in the coming months. She said that the bank will likely deliver a 0.50% rate hike and start a quantitative tightening process.
The EUR/USD has been forming a channel pattern in the past few weeks. And on Tuesday, the pair managed to move below this channel in a sign that bears have prevailed. It moved to the lower side of the Bollinger Bands and below the 25-day moving average. Also, the Relative Strength Index and the Stochastic Oscillator managed to move below the oversold level.
Therefore, since bears have prevailed, the path of the least resistance will be lower, with the next key support level being at 1.0800.